The
Oriental Republic of Uruguay is an important South American ally of
the United States, even though it is barely the size of Oklahoma
and has a population of only 3.3 million. Uruguay has a long
history of stable democracy, and following Chile's example, it is
reducing its foreign debt and gradually moving toward a free market
economy. This year, President Jorge Batlle Ibañez's
administration negotiated a bilateral investment treaty (BIT) with
the United States.

However, elections in Uruguay this fall
could bring in a populist president who could steer the country
away from free markets. Sandwiched between the precarious economies
of neighboring Argentina and Brazil, Uruguay needs foreign
investment and expanded markets for its products. Moreover, the
United States needs close friends in the Southern Cone to cement
prospects for a hemispheric free trade zone. U.S. congressional
approval of the U.S.-Uruguay Bilateral Investment Treaty and active
U.S. engagement can help to protect Uruguay's market reforms and to
keep the Free Trade Area of the Americas (FTAA) negotiations on
track.

Important
Democratic Ally. Uruguay has been friendly toward the
United States ever since its founding father, José Artigas,
dreamed of creating a U.S.-style federation of states in southern
South America. That never happened, but Uruguay has had democratic
government, supported the Allies in World War II, has contributed
peacekeeping troops to the United Nations since 1952, and, more
recently, has joined international conventions on combating
terrorism. It has also backed U.S. initiatives on free trade such
as the 1990 Enterprise for the Americas Initiative and the FTAA now
under negotiation.

Despite a historic embrace of democracy
and free enterprise, socialist dreams are part of Uruguay's
history. Growing rich on beef and wool sales in the early 1900s, it
was known as the Switzerland of South America for utopian social
programs such as fictitious government jobs and expansive labor
benefits. However, such policies proved unsustainable in the more
competitive global environment following World War II. Steady
economic decline stoked unrest as urban guerrillas called Tupamaros
tried to overthrow the government, which prompted a military
takeover that began in 1973.

When
Uruguay returned to democracy in 1985, the traditional National and
Colorado parties fought to consolidate civilian rule, open markets,
and limit Uruguay's expansive public sector. Yet, socialists and
former Tupamaros, united under the Broad Front (now subsumed into
the Progressive Encounter coalition), have sought a return to the
1930s welfare state. They include current presidential candidate
Tabaré Vázquez, who is leading in polls only weeks
before the October 31 presidential election.

Economic Freedom
at Stake. Uruguay could be a tipping point in the Southern
Cone. Battered by trade dependence on Brazil, which devalued the
real in 1998, and Argentina's economy that collapsed from
corruption and mismanagement in 2001, Uruguay's gross domestic
product declined by nearly 11 percent in 2002 and remained flat in
2003. It needs expanded access to external markets to restart
growth and restore confidence in economic freedom as opposed to
failed populist policies of the past.

In
February 2002, Presidents Batlle and George W. Bush met in
Washington to discuss strengthening U.S.-Uruguay commerce. A
bilateral free trade agreement is unfeasible because Uruguay is a
full member of Mercosur, a South American common market that
includes Argentina, Brazil, Paraguay, and Uruguay. This restrictive
customs union prohibits outside trade pacts without the other
members' approval, which is unlikely as long as Brazil and
Argentina have yet to improve trade relations with the United
States.

Thus, U.S. and Uruguayan negotiators
agreed on a bilateral investment treaty that guarantees equal
treatment for domestic and foreign businesses for broad commercial
sectors and establishes methods to redress commercial grievances.
Legal texts are expected to be finished this month, after which the
agreement can be signed. The BIT will strengthen investment and
trade between the two countries and further open the door to
U.S.-Southern Cone commerce, ultimately supporting negotiations for
the FTAA.

Time Is
Short. Falling outside Trade Promotion Authority, the
U.S.-Uruguay BIT does not change any U.S. law and should easily win
Senate approval. However, the U.S. should act quickly, or a
valuable opportunity may be lost. If Vázquez wins the first
round of Uruguay's presidential elections October 31, the General
Assembly--now in recess--will not be able to reconvene to ratify
the treaty before he is inaugurated in March. Vázquez claims
Batlle's warming relations with a "hegemonic" United States is a
mistake and promised to "review" the BIT. He favors closer ties
with Mercosur partners, higher external tariffs, import quotas, and
public works projects financed by higher taxes.

Some
of those plans could be moderated by his proposed minister of
economy and finance, Senator Danilo Astori, a pragmatic economist.
Even if Uruguayan ratification of the BIT is delayed until next
year, Washington should still engage Vázquez and his
advisers. U.S. acceptance will show American commitment to free
trade relations and a willingness to promote prosperity--when
Uruguayans are ready for it--through expanded market opportunities.
Meanwhile, the U.S. Trade Representative should pursue a similar
investment treaty with Mercosur member Paraguay and work to resolve
differences with Argentina and Brazil about the proposed FTAA.

Conclusion. A prosperous, free-trading
Chile would be a model for other South American countries. Uruguay
has been slowly moving in that direction since 1985, but is poised
to return to spendthrift socialist economics and public sector
bloat. To encourage Uruguay's future government to leave hard-won
reforms intact and proceed with hemispheric trade integration, the
President should sign the recently negotiated U.S.-Uruguay
Bilateral Investment Treaty and urge the Senate to ratify it as
soon as possible. Negotiations are already proceeding toward
bilateral free trade agreements with Bolivia, Colombia, Ecuador,
Panama, and Peru, and the Dominican Republic and Central American
Free Trade Agreement has already been successfully negotiated.
Although short of a free trade agreement, a bilateral investment
treaty with Uruguay can be another step in securing a prosperous,
stable neighborhood of the Americas.

Stephen
Johnson is Senior Policy Analyst for Latin America in the
Kathryn and Shelby Cullom Davis Institute for International Studies
at The Heritage Foundation.